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Burger King plans expansion of Tim Hortons

The Associated Press

Posted:
08/26/2014 07:59:14 AM EDT

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A Burger King sign and a Tim Hortons sign are displayed on St. Laurent Boulevard in Ottawa, Canada, on Monday, Aug. 25, 2014. Canada's iconic coffee chain, Tim Hortons, and Miami-based Burger King say they will join forces, but will operate as independent brands to form the world's third-largest quick service restaurant company. (AP Photo/The Canadian Press, Sean Kilpatrick)

MIAMI (AP) — The fight for the coffee and breakfast crowd is heating up, both at home and abroad.

Burger King said Tuesday it will buy Tim Hortons in an $11 billion deal that would create the world's third largest fast-food chain. The company is hoping to turn the coffee-and-doughnut chain into a household name outside Canada, and give itself a stronger foothold in the booming morning business.

Alex Behring, Burger King's executive chairman, said the new company would be one of the fastest-growing fast-food chains in the world.

The international ambitions for Tim Hortons echo the strategy Burger King's owner, 3G Capital, has applied to Burger King since buying the hamburger chain in 2010. Given Burger King's struggles in the U.S., the investment firm has focused on opening more locations in countries including China and Russia by striking deals with local franchisees.

Last year, for example, 3G accelerated expansion and opened 670 Burger King locations. Burger King now has nearly 14,000 locations globally, but the company has noted that's still far less than the more than 35,000 McDonald's restaurants around the world.

In the U.S., Tim Hortons could also give Burger King another way to tap into the attractive coffee and breakfast markets, which have been dominated by players including McDonald's, Dunkin' Donuts and Starbucks. Marc Caira, the CEO of Tim Hortons, noted the Canadian chain's recent efforts to make a bigger push into the U.S., including updated store designs that feature couches and fireplaces.

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Caira said he felt Tim Hortons could "win much quicker" in the U.S. with the help of Burger King. Most of Tim Hortons more than 4,500 locations are in Canada; 866 of them are in the U.S. Last year, Tim Hortons' U.S. sales rose 1.8 percent at established locations.

Winning over customers will nevertheless be a challenge for Tim Hortons, considering the chain's lack of name recognition in the U.S. Competition in the mornings has also been intensifying. Taco Bell, for instance, recently launched a national breakfast menu and Starbucks revamped and expanded its breakfast offerings. McDonald's has said it plans to put more marketing muscle behind breakfast to defend its leadership position.

After the deal, which is expected to close by early next year, Burger King and Tim Horton said their newly combined company would have about $23 billion in sales and more than 18,000 locations. The corporate headquarters will be in Canada, but Burger King will still be operated out of Miami.

Executives said the two chains will continue to be run independently. That means people shouldn't expect to see Timbits — Tim Hortons' miniature doughnuts — alongside Whoppers on Burger King menus.

"There's no plans to mix the products or do co-branding," said Daniel Schwartz, CEO of Burger King and a principal of 3G Capital.

Burger King executives also stressed the deal wasn't being driven by a desire for lower tax rates: Schwartz said the company doesn't expect to achieve any "meaningful tax savings."

3G Capital will own about 51 percent of the new company. Last year, the firm also teamed up with Warren Buffett's Berkshire Hathaway to buy ketchup maker H.J. Heinz Co.

Berkshire Hathaway is also helping finance the Tim Hortons deal with $3 billion of preferred equity financing, but will not have a role in managing operations.

Under the deal, Burger King will pay $65.50 Canadian ($59.74) in cash and 0.8025 common shares of the new company for each Tim Hortons share. This represents total value per Tim Hortons share of $94.05 Canadian (US$85.79), based on Burger King's Monday closing stock price. Alternatively, Tim Hortons shareholders may choose either all-cash or all stock in the new company.

Tim Hortons stock was up nearly 9 percent at $81.25. Burger King's shares were down 2 percent to $31.63.

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